SEC Grows Suspicious of Declining Auditor Fees

February 24, 2014, 1:48 PM ET

SEC Grows Suspicious of Declining Auditor Fees


Senior Editor

U.S. securities regulators are wary that pressure to reduce auditor fees could lead to worse audits.

Regulators grow “worried” when auditor fees appear to fluctuate with economic cycles, Paul Beswick, chief accountant at the Securities and Exchange Commission, said at a Practising Law Institute conference in Washington, D.C., on Saturday.

“I wouldn’t actually think audit fees should fluctuate with the state of the economy,” Mr. Beswick said. “In fact, as the economy gets worse, I would think the auditors need to spend more time.”

In financial crises, it is common for companies to say they are cutting payments to vendors by a certain percentage across the board, but Mr. Beswick says he’s heard “horror stories” about companies applying the same pay cuts to their auditors.

When companies switch their audit firms they often receive initial year fee discounts from auditors, but Mr. Beswick cautioned that companies should be careful that a lower audit fee isn’t the primary motivation for switching firms.

Auditors themselves often propose a lower fee for the initial year audit as an incentive to win business. In recent years, when companies switch from a Big Four accounting firm to a non-Big Four firm, audit fees declined about 62% of the time, while audit fees declined about 38% of the time when companies switch between Big Four firms, according to research from professors at the State University of New York at Old Westbury and Florida International University.

“We keep hearing stories about some audit committees fee-hunting,” Mr. Beswick said. Audit committees are in charge of appointing the auditor, but requesting a lower fee from an incoming auditor might not fully appreciate the economics of audit work, Mr. Beswick said.

Audit committees could also run into legal issues in cases where an auditor fee reduction is followed by a material misstatement, and shareholders or regulators may be concerned that board members violated their fiduciary duty, he said.

Fee cuts can put “pressure on the nature of the services,” Mr. Beswick said.



About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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